By - Adedoyin Shittu
Throughout history, industrialization generates rapid structural change, drive development, alleviate poverty and unemployment. This was seen in the United States, United Kingdom, France, Japan, and Germany when industrialization transformed those countries into some of the world’s wealthiest nations. Most recently, a new age of industrialization helped push China into one of the world’s fastest growing economies and removed India from the world poverty headquarters, so a robust manufacturing sector is broadly understood to be a fundamental path to economic growth and development. A strong manufacturing sector improves a country’s external account balance by decreasing imports and diversifying exports, thereby increasing resilience to external shocks as compared to reliance on primary commodities.
In Africa, farming and services are still dominant and this is backed by the export of commodities, despite the continent manufacturing potential. Most African countries are blessed with natural resources, yet much of the region’s industrial production remains centered on resource-based manufacturing. Resource-based manufacturing accounts for approximately half of total manufacturing value added (MVA) and manufacturing exports. In terms of manufacturing value added (MVA) and manufacturing export, Africa lags behind the rest of the world with the sector contributing about 10% to the GDP.
Though manufacturing in Africa has grown faster than it has in the rest of the world, African countries continue to struggle in their efforts to catch up with the industrial development of the rest of the world. In order to support industrialization, African regional bodies and governments are trying to break down trade barriers, improve financial structures, and invest public resources in much-needed infrastructure, especially in the area of transport, energy networks and the Internet. Most importantly, the need for the industrialization of Africa gave birth to African Continental Free Trade Area (AfCFTA). AfCFTA came into force on May 30, 2019 and it includes nearly every country on the continent. AfCFTA is set to create one of the world’s largest free-trade areas in terms of the number of countries, covering more than 1.2 billion people and over $4 trillion in combined consumer and business spending.
AfCFTA proposes to create a single continental market for goods and services as well as a customs union with free movement of capital and business travelers. This will accelerate continental integration and promote intra-African trade. This will also foster a more competitive manufacturing sector in the continent and promote economic diversification. The removal of tariffs will create a continental market that allows companies to benefit from the economies of scale. Economist says if AfCFTA is successful, Africa’s manufacturing sector will double in size, with annual output increasing from $500 billion in 2015 to $1 trillion in 2025 and creating an additional 14 million stable, well-paid jobs. Some studies show that AfCFTA could increase intra-Africa trade by about 52 percent, resulting in an increase of African manufacturing exports.The potential for the AfCFTA is big for both structural transformation and poverty alleviation in Africa. There is significant room for growth in African manufacturing within the continent and AfCFTA is a sure way to instigate this growth.
Investment is at the heart of Africa’s needs and Foreign direct investment (FDI) flows have been theoretically argued to be vital for economic prosperity and sustainability because it has elements of industrialization, employment generation, capital formation, environmental sustainability and economic growth. Foreign Direct Investment (FDI) in manufacturing has begun to increase rapidly in recent years in the region despite the common perception that foreign manufacturers tend to avoid investing in sub-Saharan Africa.
China’s investment in Africa has been of particular interest seeing the enormous interest the Asian country have for Africa. FDI from Chinese firms has increased by nearly 200 percent in recent years, with a 106 percent increase in project numbers in 2016. China has direct investment in 51 African countries and these direct investment stock has increased significantly over the years with inward FDI (stock) from China increased by over 150% from US$ 16 billion in 2011 to about US$ 40 billion in 2016. China’s FDI explosion in Africa is driven by the increased demand for resources and markets to support China’s fast-growing economy . Chinese investment in Africa covers various sectors which include construction, mining, manufacturing, financial intermediation, information transmission, computer services and software and others, which is an indication of the diversification of its foreign investments in the continent. Nevertheless, the construction and mining sectors continue to be the main sector target of Chinese investment. Findings have shown that Chinese FDI and other foreign FDI has an impact on industrialization of Africa rather than the continent getting industrialized, as a result of increasing investment from China, the reverse is the case.
African government while entertaining foreign investment should do everything possible to safeguard local industries, by ensuring that they are not suffocated or outmuscled by the financial and technology prowess of these investments. Additionally, African government should ensure adequate electricity supply for the industries to carry out their economic activities.
While industrialization has started to plateau in most developing regions, Africa contains a wealth of favorable factors, particularly the availability of low-cost labor and an abundance of natural resources and raw materials—that signal a revolution in manufacturing is imminent.
African leaders are also increasingly aware that manufacturing is a major factor in helping Africa achieve their goals of successfully reaching the next stage of economic development and they are seeking new and innovative ways to attract investment and nurture industry. They are implementing strategies that involve targeted investment in infrastructure, improved regional integration, and the establishment of special economic zones (SEZs) for priority subsectors, take for example the Lagos State Special Economic Zone in Nigeria. The African Union has also put the manufacturing sector front and center in its Agenda 2063.
However, in order for African states to reach its manufacturing and industrial potential, some of the key structural constraints that have prevented Africa’s manufacturing sector from maturing and from launching the same kind of economic modernization process witnessed in other developing regions need to be addressed
Africa owes much of its economic growth to its large working-age population. In order to grow and be competitive, the manufacturing sector needs capable, healthy, and skilled workers. So there is an urgent need to build the human capacity in Africa to upgrade to an advanced one. Policymakers need to revisit the education curriculum to promote science, technology, engineering, entrepreneurship, mathematics as well as vocational and on the job training.
There is also an urgent need to bring down the cost of doing business in Africa and challenges such as energy, access to roads and ports, security, financing, bureaucratic restrictions, corruption, dispute settlement, and property rights, among others should be addressed in order to ensure manufacturing growth in the continent. Political leaders also need to implement reforms aimed at improving business conditions. Fortunately a lot is ongoing in this area as the latest World Bank’s 2019 Doing Business Index shows that five of the ten most-improved countries are in Africa, and one-third of all recorded reforms occurred in Sub-Saharan Africa.
Policymakers also need to offer tax incentives to firms most especially the local firms who are not financially buoyant like foreign firms in order to unlock job creation and increase individual and household incomes. Measures that could encourage the consumption of locally made commodities should also be promoted.
Small-scale industries are the backbone of industrial development in developing countries and they lack the financial services they need to grow and innovate. Policymakers need to facilitate access to finance, especially for small and medium enterprises.
Africa can be the “China” of the next decade and the continent has all the right ingredients to make this happen if only the right policies are implemented by the political leaders. Africa is sitting on more than $82 trillion in discovered natural resources, and also possesses other natural resources, such as minerals, rivers, forests and fisheries, in vast quantities. The continent also have high access to mobile technology and a young, entrepreneurial demographic. These drivers have the potential to ensure that Africa leapfrog into the Fourth Industrial Revolution and become a center stage in the revolution.
Copyright © MMXVI - MMXX. African Economics | Business | and Political affairs 360 degrees coverage | Independent | Analysis | Insight | africa360degrees.com. All Rights Reserved.